In part 3 of our study of free markets, we looked at what happens when there is governmental intervention in prices. We saw that rent controls that are designed to provide affordable housing by keeping rents artificially low result in a shortage of low cost rentals due to a lack of individuals going into the rental business because of the lack of profitability . We also saw that government subsidies designed to keep prices artificially high result in surpluses because there are too many suppliers. In this part we will begin looking at what happens to the market when the government tampers with supply (Sowell, 2007).
In July 2008 the price of crude oil had risen to $126.16 per barrel (InflationData.com, 2010). This caused a spike in the price at the pump of over $4 per gallon. This spike in prices caused individuals to drive and fly less thus affecting the travel industry. To intervene in this matter, President Bush decided to lift the ban on offshore drilling (Eggen & Mufson, 2008).
With this announcement crude oil prices began to decline and hit a low of $31.04 per barrel in February of 2009 (InflationData.com, 2010). It is interesting to note that even though production did not immediately increase after the announcement, just the mention of a possible increase in supply led to a decline in the price. This is because speculators who base their asking price on future supply and demand purchase crude oil. These speculators viewed this announcement as a future increase in supply and thus a reduction in price.
However, on February 22, 2009 President Obama announced that he was reinstating the ban on offshore drilling (LoBianco, 2009). Since this announcement, the price of crude oil has risen to $71.52 as of the date of this posting (Bloomberg.com, 2010). This restriction of supply may not be the only reason for this increase but speculation of a reduction in the future supply of crude because of the announcement caused contributed to the increase. Once again, the speculators who purchase crude oil viewed this as a future reduction in supply and causing an increase the futures price.
Of course we must now ask the question, why the government would want to restrict domestic drilling for crude oil if it will mean an increase in prices. The answer is that due to environmentalism, many see the use of fossil fuels as damaging to the ecosystem. These environmental groups have been able to raise a large amount of cash and thus are able to lobby the Congress to pass legislation restricting crude oil production. However, recent discoveries through leaked emails have placed doubt on the science used to assess damage to the environment due to the use of fossil fuels.
In the next posting on free markets, we will begin to look at the history of the environmental movement. We will look at how Environmentalism has permeated the media, academia, and how the science used to prove the existence of man-made climate change is flawed. This does not mean that we do not have a responsibility to protect the environment; just that scientific study of the issue needs to be free from the politics of the issue so the scientific research can be done without bias.
References
Bloomberg.com (2010, February 8, 2010). Commodity futures. Retrieved February 8, 2010, http://www.bloomberg.com/?b=0&Intro=intro3
Eggen, D. & Mufson, S. (2008, July 15, 2008). Bush rescinds father's offshore oil ban. Washington Post, , . Retrieved January 27, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2008/07/14/AR2008071401049.html
InflationData.com (2010). Historical crude oil prices (table). Retrieved Retrieved January 27, 2010, http://inflationdata.com/Inflation/inflation_Rate/Historical_Oil_Prices_Table.asp
LoBianco, T. (2009, February 11, 2009). Obama blocks offshore drilling. The Washington Times, , . Retrieved January 27, 2010, http://www.washingtontimes.com/news/2009/feb/11/drilling-ban-revisited/
Sowell, T. (2007). Basic economics (3rd ed.). New York: Basic Books.
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